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Edited version of private ruling
Authorisation Number: 1011663665551
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Ruling
Subject: Income - partnership
1. Are you assessable on your share of partnership income which you did not physically receive?
Yes. Your share of partnership income is assessable as you are entitled to receive it, despite not having physically received it.
2. Do you return your share of partnership income in the income tax return for the year ended 30 June 2010?
Yes.
This ruling applies for the following periods:
1 July 2008 - 30 June 2009
1 July 2009 - 30 June 2010
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You and your former spouse carried on a business in partnership. The partnership ceased operating just prior to the end of the income year.
The partnership was on the simplified taxation system operating on a cash basis.
At the date the partnership ceased there was an amount of outstanding debtors which had been invoiced out but had not been collected.
The debtor monies were collected after the end of the income year. They were not deposited into the partnership bank account; they were deposited into your former spouse's bank account who retained all monies.
You have not received the money nor are you likely to receive any of this money.
You have not taken legal action to settle the dispute with your former spouse.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 92(1)
Reasons for decision
Subsection 92(1) of the Income Tax Assessment Act 1936 (ITAA 1936) includes in the assessable income of a partner in a partnership the individual interest of the partner in the net income of the partnership. This is assessable even though the partner does not draw the full share of the profits (Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199; (1943) 7 ATD 179; (1943) 2 AITR 421).
The net income of a partnership should be distributed according to the basic agreement between the partners for the sharing of profits and losses. Only in certain cases this rule would not be accepted, for example where it is apparent that the partnership agreement is merely a device to enable distributions to be made that are completely out of proportion to the partners' true interests in partnership assets or their participation in the partnership business (for further information see Tax Ruling IT 2316: Distribution of partnership profits and losses).
In Case U96 87 ATC 581: AAT Case 78 (1987) 18 ATR 3562 (Case U96) the taxpayer operated a business in partnership with her de facto husband. The partnership was dissolved and a partnership return was lodged recording a division of income in equal shares to each partner. The taxpayer claimed that her income from the partnership was a lesser amount and that her former de facto husband had appropriated the balance of the amount due to her. The Tribunal held that where a partnership is determined, the rights of a partner to share in the profits accrued to him or her at the time of that determination, and that share of the profits must be treated as then having fallen into his or her hands whether or not they actually fall into the hands of the specific partners. The assessment including the taxpayer's full share of the partnership profit was confirmed by the Tribunal.
Therefore, on the basis of subsection 92(1) of the ITAA 1936 and Case U96, you would be required to include your share of partnership net income in your income tax return even though part of the net income has not been physically received by you.
Note
Taxable income is calculated in accordance with the method of accounting that correctly reflects the true income. A taxpayer on a cash basis cannot return income in a year other than that in which it is received, even if it relates partly to another year, or expenditure incurred in gaining it is deductible in a different year.